赫斯 (HES) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2005 Amerada Hess earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions]. I would now like to turn the presentation over to your host for today's conference, Mr. Jay Wilson, Vice President of Investor Relations. Please proceed, sir.

Thank you, operator. Good morning, everyone, and thank you for participating in our first quarter earnings conference call. With me today are John Hess, Chairman of the Board and Chief Executive Officer; John O'Connor, President-Worldwide Exploration and Production; and John Rielly, Senior Vice President and Chief Financial Officer. Today, certain forward-looking information and other previously undisclosed items may be discussed during the call. I'll now turn the call over to John Hess.

Thank you, Jay. And welcome to our first quarter conference call. I would like to make a few brief comments.

With regard to exploration and production, our first quarter production averaged 358,000 barrels of oil equivalent per day, up 3.5% over the fourth quarter. In addition to strong operating performance from our existing assets, production commenced from three new field startups in February. In the Malaysia,Thailand joint development area, where our corporation has a 50% working interest in Block A-18, gross production is currently averaging 165 million cubic feet per day. Gross production is expected to reach 390 million cubic feet per day, or approximately net 140 million cubic feet feet per day in the fourth quarter of 2005, following completion of the buyers' gas separation plant which is being constructed on shore Thailand.

In the United Kingdom, our corporation has a 9% interest in the Clair field, which is currently producing net 1,200 barrels per day. Production is expected to ramp up to a net plateau rate of 6,000 barrels per day by 2007. In Azerbaijan, our corporation has a 3% working interest in the ACG fields, where crude oil production from the central Azeri field started in mid-February. This represents the first phase of the ACG full field development. Net production is expected to grow from 3,000 barrels per day currently, to approximately 20,000 barrels per day by 2008.

At the end of March, we acquired a 65% interest in a company operating in the Volga-Urals region of Russia. Production is currently averaging 7,500 barrels per day, and we continue to evaluate opportunities in this oil rich region.

With regard to exploration, in the second quarter we will spark two offshore exploration wells in Gabon and the Bellude (ph) north well offshore Malaysia, which follows our Bellude south discovery announced last December. Also at the end of the quarter we expect to spud our Washita prospect on Green Canyon Block 376 in the deep water Gulf of Mexico. In the first quarter we expensed two dry holes, Wembley and Diamondback, both of which encountered non-commercial hydrocarbons.

With regard to refining and marketing, during the first quarter we had scheduled turn-arounds of our fluid catalytic crackers at both our HOVENSA joint venture and Port Reading refineries. Both of these turn-arounds were completed successfully. The refineries are currently operating at full capacity and are positioned to benefit from the current strong margin environment.

In conclusion our exploration and production and refining and marketing businesses are performing well in an environment which is favorable to both. I will now turn the call over to John Rielly who will provide more details on our financial results after which we will be happy to take your questions.

Thank you, John. Hello, everyone. Our earnings release was issued this morning and it appears on our website. The earnings release and attachments include expanded disclosures covering details of exploration and production earnings, hedging positions, and refining and marketing financial and operating data. We have provided comparable disclosures for each quarter of 2004 and 2003 in the Investor Relations segment of our website. In my remarks today, I will compare first quarter results to the fourth quarter of 2004.

Net income for the first quarter of 2005 was $219 million compared with $229 million in the fourth quarter of 2004. Turning to exploration and production, income from exploration and production operations was $263 million in the first quarter of 2005 compared with $211 million in the fourth quarter of 2004. The first quarter earnings include a gain of $11 million from an asset exchange and income of $11 million from a legal settlement. The fourth quarter earnings include a gain of $21 million from an asset sale and foreign income tax benefits of $19 million from a change in tax law and a tax settlement.

Excluding these items, E&P earnings in the first quarter amounted to $241 million, compared with $171 million in the fourth quarter. The after-tax components of the increase are as follows: Average crude oil and natural gas selling prices were higher which increased earnings by $58 million. Higher exploration costs, including the after-tax dry hole expense for Wembley and Diamondback in the Gulf of Mexico decreased earnings by $27 million. Decreases in production expense and DD&A increased earnings by $19 million. Our effective income tax rate was lower, which increased earnings by $23 million. All other items net to a decrease of $3 million, for an overall increase in first quarter adjusted income of $70 million.

The effective income tax rate on exploration and production earnings earnings for the first quarter was 42%. The full-year 2005 effective income tax rate is expected to be in the mid 40% range, excluding the effect of Libyan operations. Assuming agreements are finalized and we return to our operations in Libya, the E&P effective income tax rate would increase further.

The after-tax impact of crude oil hedges reduced first quarter 2005 earnings by $195 million, compared with a cost of $206 million in the fourth quarter. The press release provides details on the portion of our future production that is hedged and the related contract prices. The after-tax deferred hedge loss included in accumulated other comprehensive income at March 31, 2005, amounted to $1 billion 658 million. Of this amount, $144 million was realized.

Turning to refining and marketing, refining and marketing earnings were $63 million in the first quarter of 2005, compared with $93 million in the fourth quarter of 2004. The cat crackers at HOVENSA and the Port Reading facility were both shut down for approximately 30 days in the first quarter for scheduled maintenance. We estimate that the opportunity costs due to lost margin from the turn-arounds was approximately $20 million. Refining earnings consisting of HOVENSA and Port Reading operations, interest income on the PDVSA note and other miscellaneous items were $42 million in the first quarter of 2005, compared with $36 million in the fourth quarter of 2004.

The corporation's share of HOVENSA's income, after income taxes of $19 million, was $31 million in the first quarter compared with $19 million in the fourth quarter. Port Reading earnings were $7 million in the first quarter of 2005 compared with $11 million in the fourth quarter. After-tax interest income on the PDVSA note amounted to approximately $4 million in both the first quarter and the fourth quarter. The balance of the PDVSA note at March 31, was $243 million, and principal and interest payments are current.

Marketing earnings were $13 million in the first quarter of 2005 compared with $64 million in the fourth quarter. Retail operations had a loss in the first quarter of 2005 compared with income in the fourth quarter, reflecting significantly lower margins. Earnings from energy marketing activities were seasonally higher in the first quarter. After-tax trading results amounted to income of $8 million in the first quarter of 2005, compared with a loss of $7 million in the fourth quarter.

Turning to corporate, net corporate expenses were 63-- $69 million in the first quarter of 2005, including an income tax provision of $41 million relating to the repatriation of foreign earnings to the United States under the American Jobs Creation Act of 2004. Fourth quarter corporate expenses were $36 million, including an insurance accrual of $13 million. Excluding these items, corporate expenses increased by $5 million, primarily due to severance expense.

Turning to cash flow, net cash provided by operating activities in the first quarter, including a decrease of $130 million from changes in working capital, was $461 million. The principal uses of cash were as follows: Capital expenditures amounted to $467 million, all other items amounted to $27 million. For an overall net decrease in cash and short-term investments in the first quarter of $33 million. At March 31, 2005, we had $844 million of cash and short-term investments. Our available revolving credit capacity was $1.7 billion at quarter end. The corporation has debt maturities of only $41 million during the remainder of 2005, and $78 million in 2006. This concludes my remarks. We will be happy to answer any questions. I will now turn the call over to the operator.

Thank you, sir. [Operator Instructions]. Jeff Dietert, Simmons & Company.

I believe you had a deep tail test at Shenzi on the preMiocene. Could you talk about the results there and future plans at Shenzi?

Yes, Jeff, we did indeed take a test of the preMiocene at Shenzi number four, which as you recall was basically a replacement for the Shenzi number two which had been interrupted before reaching target. We did not encounter commercial hydrocarbons in preMiocene, but we had very good results in the lower Miocene confirming what we had seen in previous wells on the structure. As to plans for Shenzi, we're currently-- the operator is drilling the number five well and we'll see what plans the partnership have once we see the results of the number five well.

Okay. Could you also update us on Libya and discussions on your previous Oasis position and the recently acquired acreage.

In terms of the Oasis concession, negotiations with the national oil company were completed in about December, that went from about May to December and we're awaiting the response from the government of Libya. In terms of block 54, I will have John O'Connor address what our plans there are.

We have signed the participation in the offshore block 54 which we won in the Epsa license round in the quarter, and are continuing with our plans to explore on the block.

Could you describe those-- those plans in any more detail?

We do have access to seismic over the block, obviously. We will probably look at a modest seismic program later this year followed by drilling plans for a wildcat in 2006.

Arjun Murti, Goldman Sachs.

Two questions. The first, just on the Shenzi. I saw that Anadarko announced their Genghis Kahn well was successful, they're going to tie it into Marco Polo. Given they have the existing platform there and can tie it in relatively quickly, how does that affect your thinking on how to go about developing Shenzi; in terms of time frame and structure?

Arjun, obviously we're pleased at the success that Anadarko has had on the down dip location on the Shenzi structure. In terms of the partnership's plans, I would only think that it would continue to warrant an expedited approach to sanctioning and progressing the development.

Yes, okay. Then secondly, on Russia, can you just elaborate on maybe the types of things you're looking for there? I guess, A, do you all think you need to be integrated in Russia? Which seems to be the-- I guess, generally the more successful route. Are you looking more for oil exploitation opportunities or big LNG projects or exploration or maybe all of the above?

I wouldn't say at this stage that it's all of the above by any means. We're going to, initially, gain experience of the investment climate and the opportunity set in Russia, you know. This is a significant resource globally for oil and gas production and energy supplies to the world.

We have taken a position that says we will appraise, development and produce predominantly oil in a region that is close to western markets, being in the west of Russia. We think we'll continue to evaluate growth opportunities consistent with the position we currently have in the Volga-Urals region, but I would say with respect to your question, we will focus on grass roots production. There is a lot of production potential. I think that's the right way to go. LNG at integrated I think would be much further down the road, if at all.

So you don't-- the production's small today but assuming you're successful down the road, I'd imagine at some point a refinery is helpful in Russia in terms of the local crude prices being so low?

I think way premature to speculate on that. Not in our plans right now, Arjun.

Fred Leuffer.

You've grouped geographic production, so I'm wondering if it's possible for to you give me liquids production in Equatorial Guinea, Norway, Denmark and Algeria, and gas production in Norway and Denmark?

Okay. I don't know if I caught all your countries here, so --

You want to repeat those, Fred, if you don't mind just so we get it right?

Yes, John. For the liquids production in EG, --

That is 27,000 barrels a day Q1,net.

Okay, Norway?

In Norway, liquids is 30,000 barrels a day, net.

Denmark and Algeria.

Denmark was 25,000 barrels a day, net, and Algeria was 25,000 barrels a day, net.

And then lastly on the gas side, Norway and Denmark.

Norway is, 31net, and Denmark is 25, net.

All right. Secondly, unit costs still are coming in higher than I was expecting. Just tallying it up, it looks like about 19.45 a barrel. Can you give us some guidance on what you think is going to happen going forward?

Yes, now in that 19.45, you realize there is $4.13 of exploration in the first quarter, and that's driven by the Wembley and Diamondback wells. So when you look at -- when you take that away, if you look at lifting costs of 6.97, they're down from 7.50 in the fourth quarter; and G&A of $0.87 is down from a $1.03 from the fourth quarter. So when you look at it without the exploration-- and without the exploration we're about $15.30 in the-- in the first quarter, which is really one down from the fourth quarter, and fairly comparable to the whole year of 2004. So, excluding exploration for now, we think that the 15.30 comparable numbers with 2004 will hold throughout the year. Somewhere in that type of range. And then exploration is a function of choice. And opportunities that we have. We like our exploration portfolio, we've had success with it so far. And then-- and then we'll just see how the exploration program rolls out.

Just two more quick ones. John, remind me how much cash was repatriated.

Sure, we've repatriated-- as of March 31st, we've repatriated about half of the $1.3 billion that we had determined to -- that we had planned to do for the year.

And you'll get the rest of it throughout the year or all in one quarter or what?

I think you can say throughout the year.

Okay. And lastly, in the Russian investment, how much of their oil production is exported? I think you said it's 7.5 thousand per day total production, but how much of that is exported?

It's typically in that 30 to 35% range is exported.

Mark Flannery, CSFB.

Just a question for John O'Connor. I wonder, could you just remind us of the characteristics of the two wells going down in-- in Gabon this quarter? And also, remind us about Ouachita prospect as well, what are you looking for there, what do you expect?

Good question, Mark. First of all, the-- this rig is under tow into Gabon, it's about 200 miles off location; so within the next week, we should see the spud of the first well. The two wells are somewhat similar in that they're in a salt basin. They're on the flanks of salt. They are modest in cost. But under the fiscal regime that exists there, the size of the prospect would be attractive to us in the event of success. The Ouachita is another lower Miocene test and I'm not sure how much to say except that we like it very much, and you could think about it as not being unlike say Shenzi or Tahiti, in terms of size.

Okay. And is it-- is it too early to say if you've learned anything from Wembley, particularly, or even Diamondback?

Two very different opportunities, obviously. Wembley was very similar and in the same neighborhood as Tubular Bells, a lower Miocene test. We liked it very much, obviously. We confirmed field, source, trap, but we had one unavoidable, unpredictable event not occur. We still like it.

Diamondback is entirely different. A very big feature in the Paleogene. Very attractive feature, obviously. We like the fact that we gained information in the Paleogene there, in the deep Shenzi number four; and, of course, that complements the database we have from the establishment of a significant hydrocarbon column in Chinook a couple of years ago. So we are carefully going about the business of improving our knowledge in the preMiocene. You always learn a lot from drilling these wells, and in answer to your question, both Wembley and Diamondback, we have added significantly to our knowledge base; which will help us with our program as we go forward. Has not changed our views on either of the lower Miocene or the Paleogene plays.

Paul Cheng, Lehman Brothers.

John, just wondering if I can ask a couple of maybe overall questions. In Wembley, now of course a dry hole, is sort of like the nature of the beast, you're going to hit dry holes from time to time and probably more often than success well. But given the nature of the risk there, and the size of the companies, is there a better off that from a risk portfolio management standpoint not taking such a high interest-- working interest in any one particular well, instead of spread your bet a little bit wider by let's say each one taking 30% and drill more wells?

There are as many views on how you optimize an exploration portfolio as there are explorers and investors. We think that we put together a very robust exploration portfolio and, as you said, the probability of success may be in the range of 25 to 30%; so by definition, either four wells out of five or three wells out of four are going to be failures. And for each prospect, we try to balance the exposure we have, to it in terms of risk/reward on the prospect, in addition to looking at the portfolio as a whole.

So given the size of prospects in the lower Miocene, the relative scarcity of premium prospects that are well imaged and well understood, we adjust our perspective with respect to the exposure we take based on all of these factors. Secondly, would we have no difficulty at obtaining promoted partners into any of the prospects we plan to drill, so it's a conscious decision, taking into account the nature of prospect, the confidence we have in it, and the portfolio as a whole, Paul.

So that means that you think that that will fit into your strategy, so in the future, that you may continue at that, if you believe the prospect is good, that you would just take a disproportionately large working interest?

It's somewhat -- it's somewhat more complicated than that, Paul. I would say that that would not be necessarily a true statement. It's compared with what else you have, is compared to what exposure you feel is incumbent upon you and appropriate at the time. So it's always under review. And I don't think you can make a blanket statement that says we're going to take big positions in a small number of prospects necessarily. It will be constantly under review.

And John, it seems that your first quarter production numbers looked like it's better than your previous guidance, as far as our expectation. Do you have an update, what is-- what you're looking at in the 2005 or whether that view had not changed from your last time?

No, you're absolutely right, Paul. We were very pleased, obviously, with the production performance in the first quarter, given that we were close to 360,000 barrels a day, absent any contribution from Russia or from Libya, indeed. So this is the base portfolio, essentially, that's comparable to the fourth quarter and to last year; with the contributions from the JDA, which averaged about 4,000 barrels a day net to us in the quarter, and more modest amounts coming in from Clair and phase one of ECG. The fact of the matter is that in the North Sea, both in the U.K. and Norwegian and Danish sectors, all of the assets outperformed versus what we had expected probably by about the tune of about 10,000 barrels a day, versus fourth quarter.

So very pleased with that. It speaks to operational excellence, higher-than-expected gas takes by buyers and just all around sustainability of the assets. As to projections for 2005, I think we would prefer to stick with the guidance given a couple of months ago which says at the end of the second quarter, the mid-year conference conference call, we will update you on the outlook for the full year.

Okay. And John, since you had some asset sales, do you have the impacted production number and reserve number for those assets sales in the first quarter?

Hudson, the-- the asset that we swapped to get in additional interest in Pangkah has about a production of about 3,000 barrels per day.

And when did you -- when did the deal close? In other words, 3,000 from the first to the second quarter will be reduced to 3,000 or --

Oh, no, no, in the first quarter it was-- it was an immaterial impact on the first quarter production. Sorry, Hudson in general has about 3,000 barrels a day in production.

So the second quarter, you will be -- from the first quarter, everything else equal will be down by 3,000, in other words?

Correct.

Okay. And that I think -- this is for John Hess. John, if I -- PDVSA has been making some noise talking about CITGO, that they want to sell their refinery or at least one or two refineries there. Have they engaged you guys on any discussion related to their position in HOVENSA?

No, they haven't and in fact we just had our board meeting yesterday at HOVENSA-- our quarterly board meeting and the relationship with PDVSA is excellent.

So I mean they have absolutely did not disclose any intentions saying that they wanted to sell that interest?

No.

John, if we're looking at your cash position which is close to $900 million and with the very high commodity prices, is there any opportunity for you to be able to use some of the cash to pay down the debt? I presume that you would get some net reduction in your interest expense and be a more productive use of the capital.

Paul, I mean, as we've been talking about in the past couple calls, we still are focused on making sure our developments come online, on time, and there's a significant amount of capital expenditures still to go on these key projects. So our clear first focus is making sure the developments are paid for. We have the cash flow to do that. And then if there's excess cash flow at that point in time when the developments are on stream, we'll start looking at-- at reducing debt or other options.

John, out of the 144 million realized deferred tax-- deferred tax-- deferred loss on the hedging, how much of that is going to be in the second quarter?

We've actually laid that out in the press release.

Oh, I'm sorry.

No, that's fine. And there's 51 that's going to happen in the second quarter. It's on-- on page six. In the third quarter, will be $48 million. And in the fourth quarter, it will be $45 million.

Perfect. Just one final question. In the corporate expense, it seems they have been trending somewhat higher than you guys the previous guidance, just clearly that has been over 20 million. Is there any update on that number going forward?

No, I think in the first quarter conference call, and in our-- on our 10-K, we said that our corporate expenses will be between 90 and $100 million for the year. As I mentioned earlier, we did have some additional severance expense recorded in the-- in the first quarter. But again, you just have normal timing differences on corporate expenses. So we're still staying with that same guidance of 90 to 100 million.

Doug Leggate, Smith Barney.

I wonder if I could dig a little deeper on the tax guidance. It strikes me that the-- the upstream tax was quite a bit lower than the guidance you'd given us previously. You're now still talking about a mid-40s number for the balance of the year, but can-- can you just walk us through how that low tax number came about and if oil prices, let's say, are to stay in the low 50s for the balance of 2005, how the mix effects would bring that tax for the-- for the balance of the year and perhaps the outlook going forward?

This is really -- unfortunately, it's-- it's kind of a simple and short answer. We do expect it to be in the mid 40% range for the full year. And really, what happened in the first quarter, and this is going to happen from quarter-to-quarter which is why we try to focus on a full year. It's just mix. For instance, even though we don't have an under -- an overall underlift and overlift, we had less liftings in -- in Norway than-- than we typically have. So you had -- we didn't have the higher tax rate impacting our overall rate in the first quarter. So it really is -- it's just a mix issue and I stick with the guidance of, you know, mid 40% range for the year.

Okay. But that suggests that that's going to reverse out a little bit in the second quarter, perhaps?

Exactly.

Okay. And I guess the only other question I had really was on HOVENSA on the dividend situation. Could you just update us on what contribution you had from HOVENSA and whether or not you expect further dividend payments over the balance of the year?

As you may know, we had one in February and, you know, the Board will consider the next potential dividend that could be in August. It'd be premature now to comment on what that amount would be until the Board deliberates.

Chris Moore, Merrill Lynch.

I was just hoping you could talk a little bit about your retail gasoline business, specifically what you're seeing in terms of margin trends now going into the second quarter? And also, if you could, any information that you're seeing in terms of overall sales volumes?

Sure. The retail business, obviously, in the first quarter was squeezed as crude prices went up, and the majority of the gasoline price, as you know, is the crude price. So we had a loss in the first quarter. Having said that, in April, as crude prices, gasoline prices have come down, you know, we-- we are in the profitable range so we're seeing an improvement in margin on the-- on the fuel side. The C-store side, you know, continues to grow and grow profitably, so that obviously strengthens the profitability of that business. In terms of growth year versus year, both our fuel sales and C-store sales are up on a year versus year basis.

And secondly, is there any -- anything left on the turn-around schedule for 2005?

Nothing material. Obviously, the two major turn-arounds that we had were the cat cracker in the Virgin Islands, the cat cracker in Port Reading, New Jersey and people I think did an excellent job in terms of operating excellence and turning them around on budget, on time, and in a cash position that I think was first quartile.

Steven Enger, Petrie Parkman.

You guys have talked recently about some pretty sizable potential investments in Indonesia. And I'm wondering if you can update us on Pangkah, kind of how you see that resource now, I believe you've got one gas sales agreement signed. Is there potential for more behind that? And then what-- what beyond Pangkah might you be focusing on in Indonesia?

Steve, you may recall that part of the resource adds that we enjoyed in 2004 was two appraisal wells that we drilled on the Ujung Pangkah feature. In both cases, we tested on the order of 2.5 thousand barrels a day of clean oil production. This occurred during the process of negotiating the gas sales agreement. And so what we're looking at now and are aggressively tackling a more full-blown development of Ujung Pangkah feature, anticipating both the development of gas, oil, and LPGs. So a much more comprehensive utilization of the resource that exists in that feature.

As you know, also, from the comments that John Riley mentioned earlier, we have traded up there, so we now have a 75% working interest, together with partner Conoco-Phillips, the other 25%. We have issued letters of intent to constructers for both the offshore and onshore components of the field development, and we'll be working to fully let those contracts over the next two to three months.

Specifically with respect to gas sales, we do have a gas contract in place. And the market is certainly hungry for additional gas volumes. In the event that we were to prove up additional resources over and above what we've currently contracted for, there's a ready market that is profitable in the vicinity of Pangkah.

Okay. So on the oil side, John, I mean do you have any sense for kind of the range of liquids resource you may have there?

You know, we're very busy working that. It's really an issue of what recovery factor we can get from a-- a joint combined gas and oil development, which would occur concurrently. We are aggressively pursuing reservoir modeling to make sure we fully understand the capability there. And when that work is done, we'll be happy to share it with you.

Okay. And is 2006 a reasonable startup date?

I think that would be aggressive, personally, but then, you know, I'm sometimes regarded as being slightly on the conservative side of the spectrum. At this stage I would say first quarter '07 with a good chance of coming in earlier than that, depending how contracts and fabrication are received.

Okay. And then kind of a similar question on Belud, I guess Belud south, you guys found significant gas but I think found some oil as well. Is that-- is that of interest to you or are you looking at this basically as a gas accumulation at this point without much emphasis on the oil?

I would say that we would suspend judgment until we drill the Belud north which is going to be drilled around the middle of the year. The phase that we might expect to find there may well be towards black oil side but until we drilled it and the drill bit tells us what we got, it's premature. So at this stage we have an open mind on it. I think all to play for, quite frankly, and we'll let the drill bit tell us through the year what exactly we have gotten.

Mark Gilman, Benchmark Company.

Couple of things, if I could. Is the number five going to be the last appraisal well on-- on Shenzi prior to development planning?

Mark, development planning is actually ongoing. There is an integrated project team formed. A lot of work has been done. Some of this work has been reported in some of the media in terms of development concepts, and production facilities. So that work is ongoing currently. The function, basically, of the number five well is to validate the models that we've got; and in the event that occurs, we don't need any further validation. Of course, if the number five does not confirm the model we've got then we've got to scratch our heads and perhaps think of another well. But at this stage, the integrated project team is steaming ahead with development concepts. The number five should validate the models. In the event that that occurs, then it's full steam ahead.

Okay. And, John, do you intend to drill the Ouachita at 80%?

It depends on whether other alternative opportunities we may have for value creation in terms of access to other opportunities, Mark. So right now, I'd say the answer is somewhat uncertain, but in the event that nothing of greater value appears on the horizon, we will be very happy to do that.

Okay. Maybe John Rielly could just take a minute and explain the rationale for the repatriation?

Sure. Obviously, with the-- with the tax act lowering the tax rate to 5% on repatriating earnings, it was an opportunity for us and companies that cannot use full foreign tax credits to offset foreign earnings that are being repatriated. So all that, but what it did for us was just create a lower tax rate, a one-time opportunity to repatriate earnings at a lower-- at a lower tax rate, Mark.

But is there a particular use of funds, John, you've got in mind that provided the rationale to do it? Or is it going to impact tax rate going forward by doing it? I guess that's what I'm unclear on.

The rationale, I mean, obviously to bring the cash back into the U.S. We have investment plans in the United States for-- for those dividends, we've laid that out, and according to the act have-- have reviewed that with our board of directors, and so that's basically the plan. Instead of leaving it overseas, we can bring it back here in the U.S. and invest it on-- in U.S. capital expenditures.

Okay. With respect to the-- the new break downs and I also expressed my appreciation to all of you for providing it, I guess I'm a little unclear, in terms of the split between the U.S. and the foreign side in E & P, what you've done with the hedging losses, and whether they're being allocated to the U.S. side, and what tax rate is burdening them? John, or Jay, could you possibly clarify on that?

Yes, I can. I mean we are allocating the hedges out between -- we have WTI hedges, which are-- are reflected against the United States results, and we have some Brent hedges that are -- that are then allocated to our foreign results. And in the foreign results, they are being benefited, those losses, at the U.S. tax rate-- 35%.

Okay. So that even though for U.S. tax purposes, they're allocated to the U.S., in that break down, they're on the foreign side?

Exactly.

Jennifer Rowland of J.P. Morgan.

Just had a question on the exploration expense. Your original guidance for the year, I believe, was 350 million. Obviously, the first quarter was a bit heavy with Wembley and Diamondback. Just wondering if that guidance has changed? And also if all of Wembley and Diamondback were expensed in the first quarter, or if any of that will show up in 2Q?

Jennifer, the-- the 50 that pre-tax that's associated with Diamondback and Wembley in the first quarter are additive to the prior guidance, so now we're talking about the range of plus or minus $400 million for the full year. As to the total amount taken, there may be 7 or $8 million carry over into the second quarter.

Angela Uttaro, Oppenheimer Funds.

My questions are regarding HOVENSA and what you're reporting here. You mentioned in your press release that refining earnings decreased, primarily as a result of the maintenance activities and the HOVENSA taxes. Can you give me a break down of the HOVENSA taxes and when they went into effect and, you know, how much you expect them to be going forward? How much you expect-- or how much you expect earnings to be affected going forward because of the taxes?

Sure. Right now, for 2005, you can use a 38% effective tax rate on HOVENSA earnings. And that will be in effect from 2005 and on, onward. During 2004, there was a transition period, and it was because HOVENSA had significant net operating loss carry-forwards. Due to the profitability of HOVENSA, we began recording taxes, on their earnings so there was a transition during 2004. So compared to the first quarter, the taxes that we recorded in this first quarter of 2005 was $19 million. But in the first quarter last year, there were really no taxes recorded.

Okay. That's significant.

Yes.

And what about -- I had heard that Venezuela was considering adding taxes. Does that have any effect on you? Or is it further on down in the process?

No, that does not have any effect on us. Our refinery is in the U.S. Virgin Islands and the taxes they're talking about is domestically in Venezuela.

Okay. I wasn't sure if they were going to impose it on, basically, your raw materials.

No. No. No additional taxes.

And you're done this year so far with your capital expenditures at HOVENSA?

No, there will be additional capital expenditures at HOVENSA throughout the year.

But no -- none requiring a shut down?

Oh, right, no, the-- the actual shut down for our turn-around of maintenance-- for the significant maintenance, that is completed. But there will be the typical ongoing capital expenditures, plus as we've discussed in our-- in our public filings, there are capital expenditures for some of the environmental requirements for the low sulfur costs.

Can you give me an idea of what your estimated total CapEx for HOVENSA will be, for 2005?

Let me break it down for you. And, first of all, any CapEx that's in HOVENSA is paid for by HOVENSA out of their cash flow. What we've talked about guidance for HOVENSA is-- basically, the significant capital is associated with the low sulfur environmental regulations. And right now, going forward, there will be approximately $350 million worth of capital expenditures in '05, '06, and maybe drifting into '07. For the low sulfur CapEx at HOVENSA. And that's the guidance we've been giving.

But no -- no break down as to how it's going to go per year?

It will be, I'd say -- actually if you hold on one second, I think I can tell that you that it's more in -- there will be approximately 215 million spent in 2005, and then you have about another 130 million projected for 2006.

I think the important thing there, you know, HOVENSA has a reasonable amount of cash on hand, and pretty strong cash flows, both. So, you know, we will not need to go into debt for these expenditures. They're fully funded already on HOVENSA's balance sheet.

Absolutely, did not anticipate that whatsoever.

Lori Woodland, Schroder's. (ph)

I'm wondering about the hedging strategy that you have. Your hedges drop off fairly significantly going into 2006. And I'm wondering if you're thinking it makes sense to add hedges for next year, or leave it unhedged or relatively unhedged?

No, fair question. You know, we put our oil hedges on in a period when we were in the investment mode transitioning our mature assets to more immature ones and taking on a lot of development expenditures; basically a transitional period to reshape our E&P portfolio. As those expenditures and developments come on to generate cash, which they're starting to do this year and will continue next year and the year after, our cash flows and balance sheet will be in a much stronger position and, at that time, we feel very comfortable with that we can take on more commodity price risk.

Okay. One more question on HOVENSA. The Venezuelan government has spoken about possibly selling some of its refinery interests. I'm wondering if ,in the event they decide to sell their interest in HOVENSA, does Hess have a right of first refusal or an ability to match it? Just in the event they might announce a sale of their interest.

Yes, the joint venture agreement, first of all, is confidential. But it has several dimensions to it. If that were to occur, we certainly would have rights that would protect our interests, number one. But number two, as I've said before, our relationship with the Venezuelans is excellent. We just had our board meeting with them yesterday. And certainly, there is no indication on their part to be going forward the way you just mentioned.

Paul Tice, Lehman Brothers.

Three quick questions. Just on your liquidity, I think John mentioned that you had a billion seven available under the $2.5 billion revolver. What was the outstanding amount? I assume that's all letters of credit outstanding against your hedge position?

That's correct.

Okay. So it was about 570 million at year end and it only went up to roughly 800 million at the end of the first quarter?

Correct. Against the revolver. We obviously have other facilities to issue letters of credit, but against the revolver, we've used 800 million of the-- of the revolver for letters of credit.

Okay. Have you used any cash balances to post as collateral or is that the-- because I would assume, given the run-up in oil prices, that the total amount would have been higher than 800 million.

Again, the amount of letters of credit have gone up from year-end. However, just from the revolver standpoint, we used 800 million.

Okay.

So that's basically how it's worked.

Okay. And then the cash that was repatriated under the Patriot Act, what was the total amount that's been repatriated so far? And was that after quarter-end?

By March 31st, we've repatriated about half of the-- of the planned 1.3 billion.

Okay. So that's not showing up in your cash balance?

Again, it's just a transition or just moving cash from foreign to domestic, so it's not changing the overall cash balance.

It's not. Okay.

One pocket to the next.

Right. And that's going to be reinvested in the ground, you said? That was for investment, right?

It'll be investment in the U.S. It can be for downstream and upstream.

Okay. And I apologize if I missed it before, but the update in terms of development spending around northern G block, that's on track at this point?

Paul, that's fully on track, exactly as we had projected, both the project and the spend are fully on schedule leading to a start-up on first production in the first quarter '07.

And how much has been spent so far?

I think it is of the order-- committed in terms of contracts to the order of 650 to 660, if memory serves me right, on a gross basis for the project.

Gross. And on the total number hasn't changed, and that is still roughly a billion?

That's right, gross.

A billion gross.

Both -- obviously, the cash piece of that it lags that commitment amount.

Right. And then lastly, any update in terms of your recent conversations with the rating agencies? I assume you've had your annual sit down with them. Any body language that you can tell us about?

We have had our annual sit-down. We went through our results. And basically, I mean as you know, through 2004, we-- we met or exceeded all the targets that we had laid out for ourselves and had discussed with the rating agencies in the prior-year sit down. So, from that standpoint, we had positive meetings with-- with all of them, and we just await their, you know, their outlook.

There are no further questions at this time. I'll now turn the call back to Jay Wilson for closing comments.

I'd just like to thank everyone for their interest in our corporation. If there are any further questions, you can give me a call at 212-536-8940. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.